lets play "pass the parcel"

Date : July 16, 2004

http://www.minesite.com/archives/news_archive/2004/july-2004/rionarcia160704.htm

Acquisition of Defiance Mining Makes Rio Narcea A Tempting Takeover Target For An Ambitious Gold Or Nickel Producer.

The initial reaction to the announcement that Rio Narcea Gold Mines was going to acquire Defiance Mining was “well done Defiance”. The offer valued the company at a hefty premium to its existing share price and relieved it of the need to undergo a dilutive fund raising to develop its Tasiast gold mine in Mauritania. Commentators have scrabbled around to find an advantage to Rio Narcea and the only positive comment from Canaccord labels the deal as neutral, but advantageous in terms of strategic development beyond the boundaries of the Iberian Peninsular. BMO Nesbitt Burns sees the deal as “slightly positive” which seen as an example of damning with faint praise. The conclusion therefore has to be that the initial reaction was spot on.

To be fair, however, BMO Nesbitt Burns makes the point that Rio Narcea was fast becoming a nickel mine with its waning El Valle gold mine and the Aguablanca nickel project in southern Spain is due to start production at the end of this year. This will be producing at a rate of 18 million lbs nickel, 11 million lbs copper and 20,000 ozs Clearly the company wants to keep a foot in gold as it is keeping the plant running at full capacity at El Valle while it moves from open pit to underground mining by treating ore from Crew Gold, and recently acquired the Salave gold project in northern Spain. Mauritania therefore makes sense as it is not too far from Spain and Tasiast is poised for development with a bankable feasibility in place.

The problem with Rio Narcea is that it is neither fish nor fowl in more senses than one. It is listed in Canada, but took a listing in Germany almost by chance which has attracted very little trade. Virtually no effort is made to woo UK or European investors despite its assets being in Spain and it still has a lot of credibility to regain in Canada after releasing some misleading information at the beginning of this year about gold production. If Rio Narcea really wants its rating to reflect the fact that it is bringing a European nickel mine into production at this stage of the price cycle a lot of work will have to be done. And the lead will have to come from the chairman who is well respected in the mining industry.

Defiance Mining also has a somewhat chequered career. Back in September 2002 a company called Midas Gold was attempting to list on AIM. Its main project was the self same Tasiast gold project which had been first identified by the Mauritanian Geological Survey and then owned and explored by Normandy La Source. A bit of pass-the-parcel then took place as it fell into the hands of Strata Mining and St Barbara Mines. Having failed with its AIM listing Midas then merged with Geomaque Exploration and was given the name Defiance Mining..At the time it was seeking support in London, Normandy was said to have spent over US$14 million on 25 kms of trenching, 25 kms of RC/RAB drilling and 3.3 kms of diamond drilling at Tasiast. The result was an inferred resource of over 1 million ounces, but the drilling was too widely spaced for it to qualify for JORC standards as it stood.

The total project consists of 16,000 sq kms of permits, so there was thought to be plenty of potential to increase this resource as the deposit had only been drilled to a maximum of 150 feet and was open at depth . There was also considerable untested strike length and potential for high grade shoots which have already been intercepted down plunge grading 22.1 g/t gold over 43.5 metres. The present position according to BMO Nesbitt Burns is that a bankable feasibility study has been completed and the project has been permitted for construction and operation. Much work has therefore been done in the intervening period as the total measured, indicated and inferred resources are now 24.5 million tonnes grading 2.65 g/t containing 2.1 million ozs gold..

According to Canaccord, Rio Narcea now intends to work with Defiance to optimise the bankable feasibility study which envisages annual gold production of just over 100,000 ozs/year at a cash cost of US$226/oz from an open pit and conventional CIL plant operation. Capital costs for an 8 year mine life are estimated at US$48.4 million and development should take around 18 months. Rio Narcea should be able through its own resources plus project finance. The question now is how long the company will remain independent. Working on the assumption that Tasiast will come into production in the third quarter of 2006 and be followed by Salave, which has historical resources of around 1.75 million ozs at 4 g/t, the company could be producing 300,000 ozs of gold by 2008 with relatively modest contributions from El Valle and the joint venture in Honduras.

An ambitious gold producer would make a move before Agua Blanca comes into production and sell it on as soon as possible to recoup most of the purchase consideration. Rio Narcea probably intends to split its gold and nickel activities anyway, but with its record the value to shareholders could be limited.. It will be interesting to see how this pans out as there is the other possibility that a nickel producer might buy it and sell off the gold assets.